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Case study: Kanterbrew Kanterbrew is an international brewery firm. It would like to invest in a new brewery in China for five years. Data on investment needs: Land (already owned at a historical cost of $ 2,000,000, but the market price is $5,000,000) A new plant for $ 10,000,000 A market research for $ 100,000 (already spent) Straight-line depreciation is used on 10 years, The brewery will be sold after five years ($ 3,000,000 for the land and $ 6,000,000 for the plant) Data on cash flows : Sales will be $ 10,000,000 in year 1. Sales will increase by 30 % in year 2 and 3 and decrease by 10% in year 4 and 5 The cost of sales counts for 60% of the sales Administrative expenses will be $ 1,200,000 each year The corporate tax rate is 30% (the same for capital gains) Financial expenses will be $800,000 each year The account receivable counts for 15% of sales The inventory counts for 20% of sales The account payable counts for 10% of sales Working capital will be recovered in year 6 The Kanterbrew balance sheet looks as follows: Accounting value in the balance sheet Equity : $ 40,000,000 Assets: $ 60,000,000 Debt: $ 20,000,000 Data about finance: Risk-free rate: 3% Covariance between return on Kanterbrew's stock and return of a market index: 0.00243 Standard deviation of the return of a market index: 0.045 Expected return on the market index: 7,5% Number of Kanterbrew's shares listed on the market: 1,000,000 Kanterbrew's stock price: $80 Kanterbrew's debt is "in fine" with a maturity of 5 years The coupon rate is 4% with yearly payment based on a face value of $20,000,000. Repayment is at face value. Kanterbrew is graded A- by Standard and Poor's. The spread for this grade is 2.5%. 1. Estimate the investment cash flow in year 0. 2. Estimate the operating cash flow for year 1 to year 6. 3. Estimate the divestment cash flow in year 5 4. Estimate the market debt value (Vo) and the cost of debt (ko). 5. Estimate the market equity value (Ve) and the cost of equity (ke). 6. Estimate the WACC of the firm. 7. Assuming that your financial structure is stable, should you invest in this new brewery in China ? Year Question 1 land New plant Market research Initial investment cash flow Question Year 1 Year Cost of sales Gross profit - Administrative Depreciation - EBIT Corporatetas EDIT:11. To Depreciation Operating cash flow from the income statement Tero Years Teara Acce ineraries Accountable Working cam Change in Wall WoWCJ Question Years Sale of the land Sale of the plant Tax on capital gairloss on the land Tax on capital gains on the plant Net tar on capital gain Net Inflow from divestment Question Cont of debt fiske free rate. Spread Future cash flows Present value le discounted future cash Market value of debt Questions First, we have to compute the beta col/vart) Cost of equity KR BRRR Market value of equity Question WACC cost of capital Question Investment cat flow Operating cash flow Cash flow from divestment - Cash Flow Discounted cash flow Net present value of the brewery Case study: Kanterbrew Kanterbrew is an international brewery firm. It would like to invest in a new brewery in China for five years. Data on investment needs: Land (already owned at a historical cost of $ 2,000,000, but the market price is $5,000,000) A new plant for $ 10,000,000 A market research for $ 100,000 (already spent) Straight-line depreciation is used on 10 years, The brewery will be sold after five years ($ 3,000,000 for the land and $ 6,000,000 for the plant) Data on cash flows : Sales will be $ 10,000,000 in year 1. Sales will increase by 30 % in year 2 and 3 and decrease by 10% in year 4 and 5 The cost of sales counts for 60% of the sales Administrative expenses will be $ 1,200,000 each year The corporate tax rate is 30% (the same for capital gains) Financial expenses will be $800,000 each year The account receivable counts for 15% of sales The inventory counts for 20% of sales The account payable counts for 10% of sales Working capital will be recovered in year 6 The Kanterbrew balance sheet looks as follows: Accounting value in the balance sheet Equity : $ 40,000,000 Assets: $ 60,000,000 Debt: $ 20,000,000 Data about finance: Risk-free rate: 3% Covariance between return on Kanterbrew's stock and return of a market index: 0.00243 Standard deviation of the return of a market index: 0.045 Expected return on the market index: 7,5% Number of Kanterbrew's shares listed on the market: 1,000,000 Kanterbrew's stock price: $80 Kanterbrew's debt is "in fine" with a maturity of 5 years The coupon rate is 4% with yearly payment based on a face value of $20,000,000. Repayment is at face value. Kanterbrew is graded A- by Standard and Poor's. The spread for this grade is 2.5%. 1. Estimate the investment cash flow in year 0. 2. Estimate the operating cash flow for year 1 to year 6. 3. Estimate the divestment cash flow in year 5 4. Estimate the market debt value (Vo) and the cost of debt (ko). 5. Estimate the market equity value (Ve) and the cost of equity (ke). 6. Estimate the WACC of the firm. 7. Assuming that your financial structure is stable, should you invest in this new brewery in China ? Year Question 1 land New plant Market research Initial investment cash flow Question Year 1 Year Cost of sales Gross profit - Administrative Depreciation - EBIT Corporatetas EDIT:11. To Depreciation Operating cash flow from the income statement Tero Years Teara Acce ineraries Accountable Working cam Change in Wall WoWCJ Question Years Sale of the land Sale of the plant Tax on capital gairloss on the land Tax on capital gains on the plant Net tar on capital gain Net Inflow from divestment Question Cont of debt fiske free rate. Spread Future cash flows Present value le discounted future cash Market value of debt Questions First, we have to compute the beta col/vart) Cost of equity KR BRRR Market value of equity Question WACC cost of capital Question Investment cat flow Operating cash flow Cash flow from divestment - Cash Flow Discounted cash flow Net present value of the brewery
